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Tilghman provides update on University's budget outlook

Posted September 29, 2009; 10:00 a.m.

by Ruth Stevens

While the University's fiscal outlook has benefited from better than expected returns on its endowment and the implementation of cost-savings measures, Princeton will need to continue with its two-year plan of budget reductions to protect its core programs, according to President Shirley M. Tilghman.

"We still face significant challenges, but we have made excellent progress this past year and we are doing everything we can to emerge from this period with renewed strength and vitality," she wrote in a letter e-mailed to the University community Sept. 29. "The University is weathering this economic storm with its commitment to excellence in teaching and research intact, thanks to the dedication and hard work of the entire campus and alumni community. For that I am deeply grateful."

This past April, the University embarked on a two-year plan to reduce its operating budget by $170 million. At that time, the endowment, which provides almost 50 percent of Princeton's operating revenue, was expected to decline in value by 30 percent by June 30, the end of the fiscal year.

The return on the endowment during the 2008-09 academic year actually was down 23.7 percent, according to a report Princeton University Investment Co. (PRINCO) President Andrew Golden presented to the Board of Trustees last weekend. As of June 30, the value of the endowment was $12.6 billion, a decline of $3.7 billion from the June 30, 2008, value of $16.3 billion.

"This value reflects the year's returns and the addition of new gifts, but unlike most years it does not reflect cash withdrawals for spending from the endowment," wrote Tilghman, who particularly noted the alumni, parents and friends whose contributions to this year's Annual Giving campaign were the third largest in University history.

"To preserve the long-term purchasing power of the endowment," she added, "we chose not to transfer funds from the endowment to the operating budget last spring. Instead, working capital for operating expenses was provided by a combination of other resources, including proceeds from a taxable bond offering last January. That has proved to be a wise and prudent decision, given the recent recovery in the markets."

Because of PRINCO's success at maximizing returns on the funds it has available to invest, the endowment's 10-year annualized rate of return is approximately 9.7 percent (compared to the MSCI All Country Index of 0.2 percent) -- even after factoring in last year's steep decline. This figure puts Princeton in the top three or four of the 40 largest endowments in terms of long-term performance. Over a 22-year period, PRINCO's annualized rate of return on its investments is 11.8 percent.

"… Universities that employed a more conservative approach to investing may have had losses that were significantly lower than ours last year, but they also had much lower annualized returns over the last 10 years," Tilghman wrote. "Had we adopted a more traditional approach, our endowment would be about half its current size and we would not have been able to lead the country in eliminating loans for students on financial aid; we would not have been able to expand the size of our student body to make a Princeton education available for more students; nor would we be able to make the critical investments we currently make in the research and teaching missions of the University."

She pointed out that even after successive 8 percent reductions in endowment spending this year and next, the payout per unit of endowment in the 2011 fiscal year still will be more than 37 percent above the 2006 fiscal year payout.

In addition to instituting the endowment spending reductions, the University's budget plan included freezing all salaries this year, with the exception of modest increases for the lowest-paid faculty and staff; halting all capital projects that were not already under way; and slowing down the recruitment of new faculty and staff.

"Our budgetary challenges were heightened by decisions to set this year's increase in tuition and fees at the lowest level since 1966 and to increase the budget for undergraduate financial aid by 13 percent so that we could continue to meet the full need of every undergraduate who qualifies for aid without requiring loans," she wrote. "We also increased the budget for graduate student stipends."

Tilghman said that through the hard work of many individuals, the savings target of $88 million for the current academic year has been achieved. University administrators and staff members are working to identify the additional $82 million that must be eliminated from the 2011 fiscal year budget.

One source will be the Voluntary Incentivized Retirement Program (VIRP) offered this summer to staff members. A total of 145 of the 460 who were eligible are taking advantage of the program, with many retiring by Oct. 16, 2009, and all by June 30, 2010. She said that this outcome will not eliminate the need for layoffs this fall.

"The number will be less than it would have been without the successful VIRP and the vacancy savings achieved by our managers over the last six months, and significantly less than the number of layoffs that have been necessary at some of our peer institutions," she wrote. "While some of the VIRP retirements result in savings as positions are left vacant or redeployed, others create vacancies that we will be filling, and to the extent possible we will try to fill at least some of these positions with staff members who will be affected by the layoffs."

Looking ahead, Tilghman said the University "will still be spending more than is prudent for the long-term well-being of the University."

"Several years ago the trustees adopted a policy of spending between 4 and 5.75 percent of the total value of the endowment each year, a band that would guarantee that current and future Princetonians benefit equally from the endowment's resources," she wrote. "This year our spending rate is 6.04 percent, which is outside the band. A return to the middle of the band will require some combination of two factors: more positive investment returns than we have projected and/or an annual increase in endowment spending beyond FY11 that is lower than the 5 percent annual increases that are anticipated under our established policy."

Because of the magnitude of this challenge, Tilghman said it is possible that there will need to be additional budget cuts in the 2012 fiscal year.

This is the third letter Tilghman has issued since the first of the year on the University's fiscal situation; the others were in January and in April. She and other members of the administration also have regularly participated in meetings with a variety of constituencies to discuss the budget and related issues. The next "town hall meeting" for students, faculty and staff is set for 9 to 11 a.m. Tuesday, Oct. 6, in Richardson Auditorium, Alexander Hall.

Two additional town hall meetings for students also are planned in the coming weeks. A town hall for graduate students is set for 6 p.m. Wednesday, Sept. 30, in 127 Corwin Hall. A town hall for undergraduate students is set for 8:30 p.m. Monday, Oct. 12, in McCosh 10.